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Prepare for take off

In their first interview, Air Malta chairman Louis Farrugia and CEO Peter Davies tell Herman Grech they intend to ‘save’ 700 jobs.

It’s been weeks since the restructuring process was announced and yet workers are still in the dark. How long will this indecision take?

Louis Farrugia: The plan was submitted on May 16 by consultants with the previous board. We inherited it, we’re following it and making sure we get a favourable answer from Brussels. The new board was appointed two weeks ago.

But in the meantime the workers remain in a state of flux and have no idea what’s going on. I appreciate you’ve been on board for a couple of weeks but the restructuring process started months ago.

Peter Davies: I think you’re right. There’s understandably a huge amount of frustration and it is our responsibility to move on as quickly as possible. But we need to make sure the business plan is the best one. We will hopefully inform staff as soon as possible exactly what’s going on.

The one thing we know for sure, since it was confirmed by the minister, is that 600 people will need to be laid off. Is this the figure you’re still aiming for?

LF: The problem isn’t just the employees. We have to reduce some €30 million costs and generate new revenue. It’s a massive task and it’s going to require focus and expertise. There are massive implications.

I appreciate the weight on employees and it will also mean redundancies. We still have to establish the method. Yes we’re going to reduce the staff complement by 600 but we’re also going to save 700 jobs.

From which departments should we expect to see job cuts? Has the company assessed what each employee does as they keep claiming they haven’t yet been approached?

PD: Six hundred is not a finite number either. That didn’t come from me. There’s nothing specific yet but we’re trying to get that done as quickly as possible because it’s unfair that workers don’t know. But at the same time we have a responsibility to make sure Air Malta is the airline everyone wants it to be.

Former Air Malta chairman Sonny Portelli told staff last November “nothing has been decided, nobody is going to be thrown out of a job so please take everything you read in the newspapers with a huge dose of salt because most of it is completely incorrect”. It doesn’t seem to be the case. People are going to be out of a job.

PD: Yes they are.

So Mr Portelli was wrong.

PD: I don’t know if he was right or wrong at the time. We’re now in June 2011 and not November 2010 and the situation is new from my perspective. As far as I’m concerned there’s an opportunity to streamline the processes in the company. Unfortunately, as a result of that people lose their job.

Mr Portelli also promised regular communications with the staff but workers tell me nothing of the sort happened since then.

PD: Between November and April you have to ask (Mr Portelli) about those communications. As far as I’m concerned, I believe in communication. In fact I’ve already sent one or two notices to the staff and we have a meeting with staff on June 24.

Have you spoken to unions?

PD: I had two meetings collectively and three or four individually. I keep union colleagues up to speed but not up to detail because I don’t know certain details myself. I made it clear we’re in a difficult position but it’s saveable.

Are you envisaging a union backlash?

PD: We have to work with our people. If you’re honest and explain why we’re making these decisions it’s good for everyone.

LF: If we are successful, we’re going to make sure that 700 jobs are not on the line every month. The issue with Air Malta is that it’s not a public entity which can receive government handouts. It’s a company which is working within commercial realities. We have to wake up to these realities. The staff are not necessarily to blame. We’re not in the blame game. We’re in the fixing game.

What’s the most immediate step to raise revenue and cut costs?

LF: We had to bring in a restructuring team and these people have had experience with (Peter Davies) in two other airlines. They cost – but they add value.

PD: It’s a bit like an iceberg. We need to firstly make sure the airline flies safely and then hopefully is commercially sensible. For this company to be successful it has to make a monumental shift in culture.

You must have some specific actions planned for the next few weeks.

PD: Some of them are commercially confidential. We’re talking to engineers, we’re discussing with the communications wing, we’re tackling as many departments as possible.

When should we expect the first lay-offs?

PD: My target is to have this airline in its new shape by the end of the summer season (October 28). From November to the winter season, we’ll be in different shape.

Will you be offering early retirement schemes?

PD: That’s yet to be decided.

LF: Obviously, we’re looking at it. It’s certainly on the table. But if I can go back, the management team are essential. We need to have the right commercial people, the people who can sell a product. Executives don’t grow on trees. We need expertise to do this restructuring.

Air Malta has engaged an Australian management company on a six-month contract to help the airline restructure. Its CEO Ray Hart is a friend of yours Mr Davies. Doesn’t this send the wrong message?

PD: What defines a friend? Someone you can absolutely trust. And that’s what we need in all organisations. That doesn’t exist in Air Malta. A business friend is someone we critically need.

Does it upset you that you’ve been perceived as a foreigner meddling in a purely local affair?

PD: Not at all. I’ve worked in other parts of the world and the same questions were asked and satisfactorily answered by turning the airline around. I don’t see why we can’t do it here.

LF: We’re bringing in experts who have done this before and we will hopefully be looking at the recruitment of locals to take the CFO and HR positions.

Mr Davies, there’s been criticism that while workers are being forced to make sacrifices, the government has given you a hefty salary. I won’t ask you if it’s justified, but again doesn’t it send the wrong signal?

PD: I think it sends the right signal. They will get over that pretty quickly and recognise that the airline business is an international product, it’s not specific to Malta – and CEOs in the business are free to roam globally. Therefore when you’re looking for a CEO of an airline, regardless of the country, you’re working in an international environment. It’s someone who’s been there, seen it before.

I come from an operational background. I can talk to the workers on any aspect of aircraft and airline operations. Part of the job I have is to win support. As long as they’re happy that they’ve got someone at the top who knows what he’s doing and can create the focus and discipline, I don’t think they care what money I get.

Do you think you’ve won the support?

PD: Not yet. I’ve got a big job to do. I have to earn their respect, and I can’t demand it. That’s why I spend a lot of time with staff and unions to make sure they understand I have the background.

The workers are being asked to make sacrifices. Will it ripple on to management? Will there still be the perks, the free flights to directors, government officials and so on? Will Air Malta remain a gravy train for politicians?

LF: It’s one of the decisions we’ve taken in the first board meeting. We are reviewing all freebies. It’s a complex situation because it takes time to understand the free tickets issues, (to analyse) whether there are contractual arrangements. But the decision has been taken and it’s being reviewed. We can’t afford them.

So will all free flights for politicians and management be eliminated?

LF: The whole system is under review. But a decision has been taken. And we won’t be able to pay for them especially once the workers are being asked to make sacrifices. It doesn’t add up.

Do overseas airlines give free flights to politicians?

PD: Lots of airlines give out a lot of freebies away, but in the past 10 to 12 years airlines have woken up to the fact that it’s difficult to make profit in this business. They tend to be related to the commercial aspect now.

In other airlines I’ve been involved with, we’ve gone through a review of the justification for free or reduced tickets, or upgrades. We have to make sure there’s no free lunch. But let’s remember we’re not talking about staff rights to free or reduced tickets here.

Has the government been informed of the board decision?

LF: The government is aware. A review means we talk to all parties. The government knows we can’t afford them.

Can the government veto the decision?

LF: I think you’re touching on an area we shouldn’t go. We’re an autonomous board. Our job is to fix the airline and my role as chairman is to communicate to the government the state of facts and work with it as the main stakeholder to find the right commercial solution.

But who is in charge? Is it the government or the board which will ultimately execute the decisions?

LF: I think the board members deserve the respect, in that they’re not puppets. We have to take the right decisions for the airline. The Prime Minister was very clear with me that this was my role.

Will Air Malta retain a strategic role?

PD: Air Malta is of strategic importance to this country’s critically important conduit, not simply for the carriage of tourists. Malta has developed a strong industrial sector which needs to be supported by an airline that provides a wide range of services. Air Malta’s values have to be Malta’s. We also need to look at the cargo opportunities.

Many mainstream airlines have adopted the low-cost model in recent years. Is that something you’re exploring?

LF: As a former chairman of Malta Tourism Authority I know of the importance of low cost airlines. I know there were differing views in the past with the airline board.

Malta would remain unattractive in terms of fares if there were no low cost airlines. They’ve forced price down and this is why Air Malta lost revenue, while not adjusting its cost structure. There’s no escaping the market forces. If people find it too expensive to fly to Malta they’ll go elsewhere. We also need to be more efficient with less people.

Are you looking at downsizing the fleet?

PD: In total we have 12 aircraft, one is in Mexico on long lease. We’re taking another aircraft out which will go overseas on another long lease, which will leave us with an operational fleet of 10 aircraft at the end of the summer.

How does that translate in cost savings?

PD: It will take out direct operating costs of €3 million a year.

Will there be an issue over Air Malta’s MIA fees per passenger?

There’s always a battle between airlines and airports. I’ve had two meetings with the CEO of MIA to see if we can commercially reduce our costs.

What contracts with third parties have been reviewed and is the government giving you free rein to renegotiate?

PD: I wouldn’t be here if someone is interfering with the commercial aspect. All of us are under review.

Have any decisions been taken?

PD: I’m not going to kneejerk myself into taking decisions because they look right. We need to go through a proper process of what we need from our contractors and we might need them to re-price accordingly.

LF: One decision we’ve taken is on Selmun Palace Hotel, a subsidiary which was costing us money. It’s important to put the property up for sale because we need the revenue, an important aspect of the restructuring plan.

The 58 workers (have received) redundancy notices and as a result creditors will be paid and it will probably be put on the market. It’s an asset for Air Malta to use.

Will the Selmun workers be offered any redundancy schemes at all?

LF: They will (have been given) redundancy notices according to law and to their agreement.

Obviously, this is going to cause some tension among all Air Malta employees who will fear receiving redundancy notices and no compensation.

LF: Selmun Palace is a subsidiary of Air Malta. It was a standalone company which didn’t survive in the hotel business. I see a difference in the nature of the agreement.

However, there’s no way I can predict the final outcome of how the reduction in staff will play out where Air Malta is concerned. All I know is that the restructuring plan requires that we reduce costs. If we don’t we won’t survive.

Isn’t this talk of doom and gloom really harmful for the airline? Doesn’t it dent consumer confidence?

PD: I think you’re right and there’s some evidence to suggest people are thinking twice, especially from overseas, whether they should choose Air Malta, or indeed whether they should come to Malta at all. That’s why we want to act quickly. We clearly need to put out the message that the restructuring is underway.

But I don’t think it’s expedient from a commercial perspective to come out with a string of platitudes that could make a bad situation worse.

Can you give a guarantee to all potential travellers that they will set foot on board the Air Malta flight they’ve booked?

PD: Absolutely. The company is solvent. We’ve done our cash flow calculations. And the board is comfortable that the summer programme will be sustained.

LF: At every stage, we’re looking at the airline in a solvent situation. We’re working within EU laws and restructuring rules.

You mentioned the end of summer. But are customers guaranteed a seat on an Air Malta flight after summer?

PD: We’re not planning to be insolvent. As we move along we begin to implement the plan which protects the chassis, and will build upon it.

Will all the reform details be made public on June 24 and by when do you expect the turnaround?

PD: The details won’t be made (public) on June 24. The staff will be updated on the process so far. Every single aspect of the company will need to be reviewed. We’re not waiting for the restructuring plan to be approved from Brussels because it would be irresponsible. Work will be carried out concurrently before the report is approved.

Employees want to know they have our trust. We’re approaching this in a very honest way. But unfortunately there won’t be room for everybody as we move forward. Frankly, I’ve been told by many members of staff, and not just management, that they understand the situation. They’re not happy about it but they recognise there are an awful lot of people in the company who perhaps will not be here after the change.

By when do you expect the company to start running at a profit?

PD: That’s a big question. I haven’t submitted the final budgets to the board. All I can tell you is the Prime Minister told me he would like to see the turnaround done as quickly as possible. The start of the turnaround should start by the end of the summer period and I’ve got to finalise the budgets in the next few weeks.

LF: Air Malta’s been through different phases. There’s the realisation that the previous business model wasn’t working, which they blamed on low-cost (airlines). That debate can continue for a long time. Now there’s the realisation that a different style of management is needed.

The situation is complex, there might be legal agreements (to amend contracts). We need to see what product we’re going to have, with the right management deciding it. Restructuring plans happen when you generate business and that’s the kind of confidence we want. It’s a massive task and we’re doing our best for the plan to work.

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